Tuesday, March 07, 2006

india *reduces* defense outlay growth, china *increases* it

mar 7th

the day after the bush visit, china announced it was increasing its defense spending by 15%. coincidence? also, it is believed that china's actual defense spending is about twice as much as it concedes, anyway.

meanwhile, back at the ranch, india *reduces* defense spending rate.

this gives me a great feeling of confidence that the UPA has china's... oops, india's best interests in mind.

In the Finance Bill introduced in Parliament on February 28, the budgetestimates (BE) for defence have increased marginally from Rs 83,000 crore in 2005-06 to Rs 89,000 crore for 2006-07 - a rise of about 7 per cent. Withinflation ruling at 4 to 5 per cent, the real increase in current rupees is onlyof the order about 2 per cent.

This is grossly inadequate to undertake any real modernisation, especially because the annual rise in international prices of weapons, ammunition anddefence equipment is usually 10 to 12 per cent. If the rupee fails to hold itsown against the US dollar and the euro in the year ahead, the situation will be worse confounded.

By whichever parameter one examines the allocations made for defence, theresults are found to be dismal and are sometimes depressing. As a percentage ofthe GDP, which itself grew at the breath-taking pace of 7 to 8 per cent per annum for a country of India's size and population, the defence budget steadilycame down from 3.59 per cent of the GDP in 1987-88 to 2.30 per cent in 2004-05and appears to have now stabilised at about 2.5 per cent.

China and Pakistan, India's major military adversaries, with whom India hasunresolved territorial and boundary disputes, both spend 5 to 7 per cent oftheir GDP on national security. The 11th Finance Commission, a constitutional authority, had suggested that defence expenditure should go up progressively toat least 3 per cent of the GDP by 2004. Parliament's Standing Committee onDefence had recommended in the mid-1990s that defence expenditure should be raised to a level of 4 per cent of the GDP for serious modernisation efforts.

The average defence expenditure was pegged at 16.48 per cent of CentralGovernment expenditure during the decade of the 1980s. This share came down to 14.63 per cent in the next decade up to the turn of the century. Similarly,defence expenditure as a ratio of total (Central plus state) governmentexpenditure came down from 10.5 per cent during the 1980s to 7.75 per centduring the 1990s, a period during which the rupee depreciated against the dollarfrom about Rs 16 to a dollar to Rs 46 to a dollar.

Taking inflation of 7 to 8 per cent also into account, the defence budget declined in terms of constant rupees by over 10 per cent per annum. Quiteobviously this led to a decline in India's conventional defence capability andpreparedness and emboldened Pakistan to launch its ill-fated intrusions into the Kargil sector of Jammu and Kashmir in May 1999.

The request for allotment of funds projected by the three Services every year isroutinely pared down by the Ministry of Defence (MoD) in the projections that the MoD makes to the Ministry of Finance (MoF). The MoF treats the projectionsas a wish list and reduces them further by an average of almost 25 per cent.

During 2004-05, the Services projected a requirement of approximately Rs 103,000 crore; the MoD reduced it to about Rs 87,000 crore; the MoF's BE allocation wasRs 77,000 crore, a shortfall of 26 per cent. This reduction is effectedarbitrarily and without consultation so that almost till the day of the budget, the Services are uncertain of their likely budgetary allocation for the nextfinancial year.

It is unbelievable that such a situation should exist after half a century ofexperience with five-year plans and defence planning. It is clearly indicative of the disinclination of successive governments to closely involve and integratethe senior leadership of the armed forces in national security decision-makingand does not augur well for long-term perspective planning.

The worst impact of the steadily declining defence budget in terms of inflationand foreign exchange fluctuation adjusted constant rupees is on themodernisation plans of the armed forces and the replacement of obsolescent weapons systems and equipment. The ongoing revolution in military affairs (RMA)has passed the armed forces by. The Indian Army, for example, is a first-ratefighting force that is armed with second-rate equipment - ready to fight battles of the early 20th century.

The Army desperately needs new 155 mm self-propelled and towed guns and the AirForce must replace its obsolete MiG-21 aircraft with more modernfighter-bombers.

As if this was not bad enough, a large chunk of the funds earmarked for capital expenditure, which goes towards modernisation, is surrendered year after yeardue to bureaucratic red tape and the fear of strictures being passed by theCentral Vigilance Commissioner for tardy procedures.

An average of as much as 14 per cent of the budgeted amount, varying between Rs5,000 and 9,000 crore, remained unspent every year from FY 1999-2000 onwardstill this was arrested in 2004-05. This year, 2005-06, the revised estimates (RE) figures are lower than the BE figures by the unspent amount of Rs 1,300crore.

The only reasonable conclusion that can be drawn is that the successive FinanceMinisters have been using the defence budget as one of the tools to manage their fiscal deficit.

The steadily declining defence budgets in terms of constant rupees are graduallydegrading national security capabilities. The continuous involvement of thearmed forces in various operational commitments and the almost complete lack of genuine modernisation are undermining preparedness for war and eroding theirconventional edge. With the economy growing at the compound rate of 7 to 8 percent annually, surely the nation can afford to invest 3 to 3.5 per cent of itsGDP as an insurance premium for national security, especially when a huge amountof over Rs 100,000 crore is earmarked for wasteful subsidies that seldom reachthe poor for whom these are intended.

The governments of the day, whether it was the previous BJP-led NDA governmentor the present Congress-led UPA government, have failed to show the concern andpolitical courage necessary to safeguard national security interests by making adequate financial provisions for the modernisation of the armed forces. Thiscan only be termed as gross dereliction of duty.

The writer is Senior Fellow and Director, Institute of Security Studies, Observer Research Foundation (ORF), New Delhi.

1 comment:

At the start of the Kargil war, the normally staid COAS, Gen Ved Malik observed: "We will fight with what we have," referring to critical shortages in operational equipment. This reflected poor planning and poor defence preparedness. Fortunately, Kargil was a limited war and resources could be concentrated to achieve an emphatic victory. Pakistan was emboldened to cross the LoC because through the decade of the 1990s, defence allocation was consciously and systematically reduced from a high of 3.5 per cent in the late 1980s to a low 2.2 per cent of the GDP.

With misplaced idealism and political naïveté, defence budgets for the first 12 years after Independence were kept as low as 1.8 per cent of GDP. The neglect of operational readiness led to India's humiliating defeat at the hands of the Chinese in 1962. We are still paying for the political sins of the time. While the Army has more than made up for its follies, the political class remains blinkered. Thanks to the Chinese, defence allocation shot up to an average 3.05 per cent of the GDP for the next 25 years.

The decline in the 1990s in defence spending designed to bolster economic reform had an adverse impact on defence readiness. In 1996, the usually cool Admiral VS Shekhawat was forced to go public when he said: "The Government has systematically ensured the decline of the Navy and the process of damage has set in." He added that no orders for ships had been placed for 10 years. The Chairman of Mazagaon Docks, an Admiral, went a step further. He staged a dharna during the visit of the Defence Minister. Over a hurriedly organised lunch, the Navy Chief had to be placated by the Prime Minister and the shipyard order book filled up.

Earlier, COAS Gen SR Chaudhury had told reporters that the state of battle-readiness was worrying and hinted that the Army should not be blamed if...

Observing Exercise Vijay Chakra in 2000, Gen Ved Malik added a new dimension to defence spending. He said there were procedural delays and red tape in utilising defence funds in time for modernisation. These are just random accounts of how seriously our governments take defence planning, budgeting and spending, because in all these three areas even 55 years after Independence there is insufficient clarity among decision makers.

On March 1, each year the Finance Minister makes a routine annual allocation for defence which by next year will cross Rs 100,000 crore - not high as a percentage of GDP (2.28) given the challenges, but substantial by standards of a developing country.

Notwithstanding the insufficiency and red tape, defence funding per se is not as troubling as the complete absence of debate. Parliament acts as a rubber stamp and the media merely regurgitates figures. Not many know that on at least two occasions recently the armed forces were ordered to surrender allotted funds in order to balance the fiscal deficit. Worse, over three successive years, defence forces had to surrender Rs 23,000 crore as 'unspent' money - they could not use it.

The problem is that till there is a fiscal commitment and an integrated mechanism for defence planning, an effective military capability and defence preparedness will elude the country. There are two ways to fix fiscal allocation: Percentage of GDP or percentage of overall Government expenditure. The first is the favoured method. The 11th Finance Commission, National Security Advisory Board and MoD have all recommended three per cent GDP for defence. Prime Minister Manmohan Singh is known to have accepted this allocation but linked its operationalisation to a higher GDP growth rate.

Top-down planning has not been realistically feasible in the absence of any defence policy or strategic guidance. Nor is there any national intelligence threat estimate, vital inputs for defence planning. As each service makes individual plans, there is no integrated planning though there is a very elaborate Integrated Defence Staff. There are no joint doctrines either.

Ideally, from a 15-year Long Term Perspective Plan must flow five-year roll on plans and the annual plan. Unfortunately, there is no statutory provision for an LTPP or a five-year plan. The fate of the five-year plans was tragic. The Eighth Plan was never approved. The Ninth Plan got the green light after three years. The Tenth Plan into its last year is still under consideration. There is therefore, neither an LTPP nor a five-year plan. It's the annual plan.

Despite the Kargil Group of Ministers' report on defence reforms and some marginal institutional changes, it is clear that successive governments are reluctant in implementing these. The key recommendation of the GoM to appoint a CDS is in deep freeze on the pretext that the services do not want it. This is a political decision and cannot be delayed any longer given India's nuclear weapon status. The Defence Secretary cannot act as the de facto CDS. Also, keeping the defence budget below three per cent and failure to utilise optimally funds for modernisation have led to creation of ad hoc military capability. The accent is on weapon systems not capabilities.

There is one other problem - of kickbacks. No one will deny the ruling political class or their proxies are beneficiaries from arms deals though after Bofors, footprints are hard to find. Sukhoi and Scorpene are just two examples of the craft of graft. The Sukhoi contract resulted in three successive governments making a bonanza. The smoke from Scorpene is getting in everyone's eyes.

Then there are the Three Cs: CVC, CAG and CBI. These are used as WMDs by governments to settle political scores to the detriment of modernisation of the armed forces. The Government has lately introduced a defence procurement manual for revenue expenditure to ensure transparency and time discipline. Another manual for capital expenditure emphasizing the existing integrity clause is in the offing. But no manual will sanitise defence acquisition as long as it is seen as a source for party funds.

Further Bofors, Tehelka and Denel have stunted decision making. Consequently over three successive years - 2001 to 2004 - armed forces surrendered Rs 23,000 crore despite the catalysing of acquisition procedures. The Government then decided to found a non-lapse-able revolving defence fund with a corpus of Rs 25,000 crore. This was approved by SAB, MoD and Finance Commission. Yet, it was reversed by the Government. Incidentally, a Defence Reserve Fund existed before 1947.

The defence budgeting sector is in a mess. There is no concept of defence export, involvement of the private sector and attracting FDI. Ten years after MoD, industry and the armed forces began eulogizing a partnership, there is little to show. The Kelkar report has made useful recommendations to boost defence industry and despite the 26 per cent FDI announced five years ago, the draw is zero. Mr Kelkar, like others, makes the plea for a 15-year LTPP, integrating private and foreign participation and reviewing the negative list of exports. Sterling in value, it is just another report.

It is not that the defence establishment was short of ideas. On paper, defence planning began in 1964 with a planning cell created in 1971 followed by an apex group in 1974 to integrate defence and development. In 1975 a Committee for Defence Planning was formed under the Cabinet Secretary and the three service chiefs. A year later CDP was supplemented by Defence Planning and Implementation Committee. And so we muddled through the 1980s until in 1984 the Defence Planning Staff (DPS) was created.

For the first time an integrated 15-year LTPP was made under the aegis of de facto Defence Minister Arun Singh. He acted as CDS to service chiefs and it worked. Then Bofors blew up Mr Arun Singh and the DPS dream. Mr Singh was brought back in 1990 to head the committee on defence expenditure. But in the era of coalition politics, its report stood still. Mr Singh was back briefly in 1999 during Kargil. And yet one more time to help with the implementation of the GoM report. Mr Singh's grief was that he was not a politician.

It is time Government legislated a 15-year LTPP based on three per cent of the GDP. Delays in decision making are fatal. The AJT took 15 year to contract, cost precious lives and doubled costs. If India is to become a global power, it must get its defence planning right".